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What are Section 125 Non-Discrimination Tests?

Employers offering employee benefit plans can not discriminate in favor of highly compensated employees (HCEs) or key employees with respect to eligibility, contributions or benefits. Non-discrimination tests ensure employers are in compliance with all regulations in order to maintain their tax-favored status. 

The IRS requires employers with Flexible Spending Account (FSA) plans and Premium Only Plans (POP) to submit non-discrimination tests annually.

Section 125 Cafeteria Plan - POP Test

  1. Eligibility Test
  2. Contributions and Benefits Test
  3. Key Employee Concentration Test (utilization)

Flexible Spending Accounts (FSA) Test

  1. Eligibility Test
  2. Benefits Test

Dependent Care Assistance Plan (DCAP) - The Dependent Care Plan test is required if the DCAP benefit is offered within the Flexible Spending Account.

  1. Eligibility Test
  2. Contributions and Benefits Test
  3. More-Than-5% Owners Concentration Test
  4. 55% Average Benefits Test

All nine tests must be satisfied to be in compliance. The Eligibility Test can be satisfied with proper plan design.

Key Employee 25% Concentration Test - applies to all pretax benefits provided under the plan. No more than 25% of the aggregate of all non-taxable benefits may be provided to key employees.

Dependent Care 55% Average Benefits Test - applies only to the Dependent Care FSA. This test is passed if the average benefit provided to employees who are non-HCEs is at least 55% of the average benefit provided to HCEs.

5% Owners Test - applies only to Dependent Care FSA. Not more than 25% of the amounts for dependent care assistance during the year may be provided for shareholders or owners (or their spouses or dependents) who own more than 5% of the stock, the capital, or profits interest in the employer (on any day of the year).

Watch how easy it is to run a FSA Non-Discrimination Test

EnsuredCompliance® offers POP, FSA and 105(h) Non-Discrmination Tests. These tests are extremly simple to execute and results are stored for up to 7 years.

Learn how EnsuredCompliance can help you

Testing is finally easy! Answer a few questions, upload data and EnsuredCompliance does the rest. The system analyzes the data and delivers the results in report. The report will provide reduction amounts for failed tests.

"EnsuredCompliance produces a very professional branded document. Ease of use is number 1! Also, RTO's support is stellar!"

Joni Horvath

Flexible Benefits and COBRA Supervisor at J.W. Terrill

JW Terill

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